As credit cards, debit cards, and other alternatives to currency have grown in popularity, the competition among the institutions that provide these financial instruments has also increased. Today, many consumers choose a credit card, debit card, or the like, based on the financial incentive to the consumer for using such a card. For example, some credit cards offer low interest rates on balances carried from month to month, other credit cards offer miles or points in frequent flyer programs, while still others offer low fees for common financial transactions.
One popular incentive offered to consumers of credit cards is a cash or cash-equivalent award or rebate as a percentage of the consumer's purchases. Generally, such money back award systems provide as an award a percentage of the dollar amount of the total purchases made by a consumer within a given time frame, usually one year. In an effort to balance the costs of administering the system with the benefits and incentives provided to consumers, the percentage used to calculate the cash or cash-equivalents that will be provided to the consumer will vary depending on the dollar amount of the consumer's purchases. Specifically, the percentage will increase as the total dollar value of the consumer's purchases increases. An exemplary award structure is shown below in Table 1. Note the increase in the percentage used to calculate the award being returned to the consumer as a function of the total dollar amount spent by the consumer.
TABLE 1Percentage ofincremental purchasevalue returned as cash toTotal purchases for thethe consumeryear0.25%<$15000.50%$1500–$30001.00%>$3000
As can be seen from Table 1, consumers who spend more than $3000 in one year are offered the highest percentage money back once the level of spending reaches $3000 for the year. Thus, for amounts above $3000, the consumer can receive one dollar in cash or cash-equivalent credits for each $100 the consumer spends, whereas the consumer would only receive 25 cents for each $100 the consumer spends if the total spending by the consumer for the year was less than $1500.
However, empirical evidence of tiered rebate systems such as that illustrated in Table 1 indicates that such tiered systems may not, in fact, adequately encourage certain consumers to increase the value of the purchases they make using the credit card. Instead, empirical evidence suggests that many consumers do not even make a sufficient amount of purchases on their credit card to exceed the lowest award tier, such as the 0.25% tier shown in Table 1. For such consumers, given the relatively low award percentage, the present rebate system does not provide an adequate incentive to use the credit card in question.
At the same time, other empirical evidence indicates that the consumers who do reach the highest tiers of a money back award structure may be sufficiently motivated to use the credit card in question even without a relatively high award percentage, such as is illustrated in Table 1. Thus, the present structure of rebate award programs may not provide incentives to credit card users in the most efficient manner possible.